Undue Influence Flashcards
What is recission?
Recission is the setting aside or avoiding of contracts and other instruments by the court where the contract contains an inherent cause of invalidity, often in the form of mistake, misrepresentation, or undue influence. Recission in equity is a discretionary remedy not a right.
What type of conduct amounts to undue influence?
R(Proctor) v Hutton
- ‘the plaintiff must prove that an unfair advantage has been gained by an unconscientious use of power in the form of some unfair and improper conduct, some coercion from outside, some over reaching, some form of cheating’
Two classes if undue influence: actual and presumed.
What is actual vs presumed undue influence?
Barclays Bank v O’Brien
- In cases of actual undue influence it is necessary for the claimant to prove affirmatively that the wrongdoer exerted undue influence on the complainant to enter into the particular transaction which is impugned
- ie. direct proof of pressure over one party by another is required
- There are two forms of presumed undue influence
2A) Where certain relationships exist which automatically give rise to the presumption that undue influence has been exercised
2B) Where there is proof of a relationship of trust and confidence between the parties
When does a class 2A presumption of undue influence arise?
The class-2A presumption arises in respect of the following transactions, if, but only if, the
transaction confers a substantial benefit on D or is manifestly to the disadvantage of P:
- The transfer of property by a child to his parent.
- The transfer of property by a ward to his guardian.
- The transfer of property by a client to his solicitor.
- The transfer of property by a pupil to his religious adviser.
- The transfer of property by a patient to his doctor.
- The transfer of property by a beneficiary to his trustee.
Royal Bank of Scotland v Etridge (No. 2)
- ‘The law adopts a sternly protective attitude towards certain types of relationship in which one party acquires influence over another who is vulnerable and dependent and where, moreover, substantial gifts by the influenced or vulnerable party are not be expected… In these cases the law presumes irrebuttably, that one party had influence over the other.’
The class 2A presumption does not arise in respect of the transfer of property by a woman to her husband, but the court will note as a matter of fact the opportunities for abuse which flow from a wife’s confidence in her husband.
When does a class 2B presumption of undue influence arise?
The class-2B presumption arises in respect of a property transfer not falling with class 2A if (i) P reposed trust and confidence in D, and
(ii) the transaction conferred a substantial benefit on D or was manifestly to the disadvantage of P
eg. Gregg v Kidd (a transfer of property by a man to his sister and her son)
How can the presumption of undue influence be rebutted?
Gregg v Kidd
- once a relationship giving rise to a presumption of undue influence has been established and it is shown that ‘substantial benefit’ has been obtained the onus is on the donee to rebut the presumption
- this can be done by establishing that the gift or transaction was a spontaneous and independent act or that the donee acted of his own free will.
Provincial Bank of Ireland v McKeever
- where independent advice has been given, even if rejected, the fact that it was given will be sufficient to rebut the presumption of undue influence
- not a guarantee as it may only have been rejected as a result of the influence exerted
Carroll v Carroll
- if a solicitor is acting for both parties there can have been no independent legal advice given
- advice does not have to be legal but competent and independent
What is the effect of undue influence and third parties?
Many of the recent cases have concerned the situation, in which a wife guarantees her
husband’s debts as a result of his undue influence. The question arises as to whether or not the bank can enforce the guarantee so obtained against the wife.
The answer to this question depends on whether or not the bank had actual or constructive notice of the undue influence.
Cases in which a bank has actual notice, where it actually knows of undue influence, are rare. What has troubled the courts in particular is identifying the circumstances in which a bank can be fixed with constructive notice of the undue influence.
What is the first step in determining whether a bank can enforce a guarantee by a wife of her husband’s debts which may have been made under undue influence?
- Establish whether there was actually undue influence or not
Ulster Bank Ireland Ltd v Roche
- first leg of the undue influence test is to establish the factual matter of whether the guarantor was under the undue influence of the debtor at the time she gave the guarantee
-. Only if that issue was resolved in her favour, would it be necessary for the court to address the legal question as to whether there were sufficient circumstances to permit the guarantor contend that the guarantee should be set aside (ie. whether she had received independent legal advice)
- If there is undue influence, the next question is whether the bank has actual (rare) or constructive notice of the undue influence.
Essentially, a bank has constructive notice of undue influence if:
(i) it was ‘on inquiry’ as to the existence of undue influence, and
(ii) it failed to take at least some measures to seek to ensure that the guarantor was openly and freely agreeing to provide the requested security.
When is a bank/ third party fixed with constructive notice of undue influence? (English position)
Barclays Bank plc v O’Brien
-The relationship of husband and wife does not give rise to a presumption of undue influence, but they do deserve ‘special tenderness of treatment’ as many cases will fall into class 2B as the wife places trust and confidence in her husband re her financial affairs and the emotional and sexual ties between them provide a ready weapon for undue influence
- In this case the husband misrepresented the effect of her joining in a charge over their jointly owned family home as security for overdraft facilities. She signed the necessary documentation not having read it or having been advised properly as to their effect, and without independent advise
- Court held that a third party was obliged to take reasonable steps to ensure that the spouse entered the transaction freely, knowing the true position. In guarantee of debts cases this is satisfied when the bank met with the guarantor spouse separately and apart from the beneficiary of the transaction and explained the potential exposure to liability and risk, and advised them to seek independent legal advise.
- A bank would be put ‘on inquiry’ where the transaction is on its face not to the financial advantage of the wife and there is substantial risk in transactions of that kind that the husband has committed a legal or equitable wrong against his wife which would entitle her to set aside the transaction. If it does not take reasonable steps in this scenario it is fixed with constructive notice.
When is a bank put on inquiry in the UK jurisdiction (later case)?
Royal Bank of Scotland v Etridge
- HoL accepted that a bank would be putt on inquiry whenever a wife guaranteed her husband’s debts
- obligations of the bank will be fulfilled where it conducted a private interview with the wife or took other reasonable
- can rely on a solicitor’s certificate to the effect that the wife was given advise as to the nature of the transaction
- knowledge on the part of the bank that a solicitor is acting for a surety wife does not justify the assumption that the solicitor has advised her of the nature and extent of the transaction.
- on inquiry even if the loan is advanced to a company of which both are shareholders
How did Irish courts respond to the position in Barclays Bank v O’Brien?
Bank of Novia Scotia v Hogan
- Murphy J stated he was prepared to adopt and apply the principles in O’Brien
When did Irish courts begin to deviate from Etridge?
Ulster Bank Ltd v Fitzgerald
- Court accepted undue influence
- However the bank manager had advised her to seek independent legal advise, and she had a financial stake in her husband’s business
- In this it differed from Barclays Bank plc v O’Brien and the transaction was not considered one-sided enough to put the bank on inquiry
- Bank was entitled to enforce the guarantee
How has Ulster Bank Ltd v Fitzgerald been criticised?
What is the commercial vs non commercial distinction in such cases?
How have the courts dealt with this in recent times?
